Failure to prevent economic crime

A further expansion of corporate criminal liability becomes ever more likely.

The law on money laundering is continually evolving at both a national and EU level, as EU governments struggle to combat ever increasing levels of economic crime. The latest legislative change is the transposition into UK law of the Fifth EU Anti Money Laundering Directive (’5MLD’) in regulations published shortly before Christmas 2019 (The Money Laundering and Terrorist Financing (amendment) Regulations 2019), and came into force extremely quickly on 10 January 2020. These regulations make relatively limited changes to the UK Anti Money Laundering (‘AML’) regime, but such changes that were made will have a significant impact on businesses which are now brought within the scope of the regulated sector including high value letting agents, art dealers, crypto-asset exchange providers and custodian wallet providers.

What is less clear is how the UK will approach the Sixth EU Anti Money Laundering Directive (’6MLD’), which will have a greater and more wide ranging impact as it focuses on standardising the approach of EU member states by establishing minimum rules concerning the definition of criminal offences and sanctions. However, the UK exercised its right to opt out of the 6MLD in September 2017 and, of course, left the EU altogether on 31 January 2020.

The reason given by the UK government for its decision to opt out of the 6MLD is that the UK’s domestic legislation is already largely compliant with the Directive’s measures, and in relation to the offences and sentences set out in the Directive, the UK already goes much further. This is to a large extent true, as for example, the maximum penalty for money laundering in the UK is fourteen years, far exceeding the four-year minimum required by the 6MLD, and the UK already criminalises inchoate offences of assisting, encouraging and attempting to launder money.

However, one requirement of the 6MLD that UK law does not at present contain is a failure to prevent money laundering offence. Article 7 of 6MLD requires EU member states to ensure that legal persons can be held liable where the lack of supervision or control has made possible the commission of money laundering by a person under its authority (such as an employee or agent) for the legal person’s benefit.

There has already been much debate in the UK about the potential expansion of corporate criminal liability to include a failure to prevent economic crime or money laundering offence. However, despite the warnings given by the National Crime Agency (‘NCA’) that British businesses will be more at risk of being drawn into corrupt practices post Brexit, as UK based companies looking to increase trade with non-EU countries are more likely to come into contact with corrupt markets. Brexit is also likely to provide greater opportunities for criminals to launder money, with overseas firms investing ‘dirty cash’ in British businesses, there is thus growing concern that the focus on how to implement Brexit itself has stalled the UK’s formally progressive legislative steps to combat economic crime and money laundering within its own shores.

At the time of the UK Ministry of Justice’s call for evidence on the reform of the law of corporate criminal liability for economic crime in 2017, it was widely acknowledged that the ’identification principle’ made it extremely difficult for large corporate bodies with complex management structures to be prosecuted, therefore there was a need to consider a reform of the law. In the almost three years that have passed since the call for evidence closed in March 2017 (it having already been downgraded from a Government commitment to consult on the creation of a broad offence of failure to prevent economic crime), no further substantive progress appears to have been made and the Government’s response is yet to be published. The Law Commission’s report on Anti-Money Laundering, published in June 2019, did not reach any conclusions on the introduction of a new offence, perhaps preferring to await the publication of the MOJ Consultation. Opposition attempts to introduce both an umbrella offence of failure to prevent economic crime in the Criminal Finances Act 2017, and subsequently a more targeted offence of failure to prevent money laundering into the Sanctions and Anti-Money Laundering Act 2018, were both unsuccessful.

However, the failure of the MOJ to report has not gone unnoticed and in the meantime attitudes in Government appear to have firmed up. The general focus has moved on from whether legislation is necessary onto the format that such a ’failure to prevent economic crime’ offence will take. The SFO and the NCA have both renewed their call for the introduction of a ’failure to prevent economic crime’ offence in evidence given before two Select Committees. When the Solicitor General – Robert Buckland QC – was questioned by the Treasury Select Committee as to why so little progress had been made, having previously said in an interview in March 2018 that there was a strong case for the introduction of a new offence, he reassured the Committee that “a lot of thinking was going on about what the precise model might be” but that he and his colleagues were “rather busy on Brexit”.

This does not appear to have impressed the Treasury Select Committee who reported on 8 March 2019 that the Government’s efforts to improve action against companies involved in economic crime seemed to have been stalled by Brexit: “despite Brexit, the Government must progress domestic priorities”. It went so far as to say it was wrong for the Government to not reform the corporate criminal liability framework for economic crime, as without such reforms, multi-national firms appeared to be beyond the reach of the law.

Further weight was added to this endorsement just a few days later by a second Select Committee, this time the House of Lords Select Committee on the Bribery Act 2010, which published its post legislative scrutiny report on 14 March 2019.

In the course of reaching its conclusion that the Bribery Act is a “model piece of legislation”, “exemplary” and “an international gold standard for bribery and corruption legislation”, the Committee examined the impact of Section 7 of the Bribery Act, the offence of failure by a commercial organisation to prevent bribery. Section 7 was enacted in response to criticisms similar to those now being made in relation to other economic crimes such as money laundering and represented a departure from the common law identification principle. The Committee concluded that the creation of such a corporate offence “was an unprecedented way of enlisting the support of those most susceptible to being involved in the offence and most able to aid in its prevention”.

Despite there having only been a relatively small number of prosecutions under Section 7 since the enactment of the Bribery Act, resulting in two convictions (one of which was a guilty plea and the other a contested case involving a small furniture business with 30 employees which was already dormant at the time of its conviction) and three Deferred Prosecution Agreements (at the time the report was published), the Committee describes the introduction of this offence as “remarkably successful” and quoted with approval Transparency International’s opinion that it has been invaluable as a tool to incentivise improvements in corporate behaviour.

In light of this perceived success of the introduction of the Section 7 offence in changing corporate behaviour, and the subsequent extension of the ’failure to prevent’ model to tax evasion in the Criminal Finances Act 2017[1], the Committee called for the Government to delay no more in analysing the evidence it received two years ago and to reach a conclusion on whether to extend the ’failure to prevent’ offence to additional economic crimes.

Both reports highlight the fact that the SFO have been lobbying for an extension of the failure to prevent offence for some time. The appointment of a Lisa Osofsky  in 2018 has only served to renew the SFO’s enthusiasm for a broad ’failure to prevent’ offence encompassing a range of economic crimes, the new Director describing the SFO as being hamstrung by the identification principle in evidence to the Bribery Select Committee. However, the Committee noted that the director of the NCA, Donald Toon, was more cautious in his evidence, stressing the need for real care around how any broader offence is structured and focused.

Indeed, organisations representing businesses and lawyers have repeatedly expressed concerns about the introduction of a wide failure to prevent offence and the additional burden that this would place on businesses. The Law Society warned that in an already complex legislative and regulatory landscape, additional laws would require businesses, particularly in the financial sector, to develop new training and compliance frameworks at a time when they are already facing significant compliance-related costs. In written evidence to the Treasury Committee, UK Finance (an organisation which represents firms across the banking and finance industry) also stressed the fact that while the financial sector has increased resource on economic crime, there has been a reduction in public sector resources in this area. In particular, banks, as a highly regulated sector, being “increasingly required to deliver functions to supplement that of the State. These include carrying out further checks on other regulated sectors (even where they are regulated by a Government body) or carrying out due diligence that exceeds that undertaken by Companies House.”

One alternative that has been proposed is the introduction of more specific failure to prevent offences, rather than an overarching umbrella offence. However, some of the concerns raised about an umbrella offence come even more sharply into focus when discrete offences are considered. Taking failure to prevent money laundering or the failure to report money laundering as examples of potential discrete offences, it is of note that, while calling for further reform, the Treasury Select Committee in 2018 criticised the UK’s anti-money laundering system as being fragmented and not fit for purpose. However, they do not address the fact that the introduction of further money laundering ’failure to prevent’ offences would add yet another layer of complexity, particularly in relation to those businesses in the regulated sector.

And while no doubt section 7 of the Bribery Act has had a deterrent effect, the Law Society highlight the fact that this offence was introduced in the absence of a robust framework of existing laws and regulations. In contrast, there are already a wide array of offences and regulations that concern anti-money laundering, particularly in relation to the regulated sector. For instance, the Money Laundering Regulations 2017 make it an offence to contravene a relevant requirement of the regulations.  Therefore, it is already a criminal offence to fail to have an effective anti-money laundering framework, both for a regulated firm and those of its directors and officers who consent or connive in the breach, or to whose neglect it is attributable.

In fact, a Freedom of Information request made in 2019 revealed that not one prosecution had been brought under the new Money Laundering Regulations between their inception in June 2017 and October 2018. While one interpretation might be that this could be owing to the regulations effectiveness in changing behaviour and the time it takes to investigate and commence a prosecution, as only 11 prosecutions were brought between 2013 and 2017 under the previous regulations (which contained a similar offence of failing to comply with the requirements of the regulations), this tends to suggest that the current law is a tool that is not being utilised effectively enough.

There is also a real concern that further legislation could actually prove to be counter-productive, as underlined by the Law Society in their response to the Law Commission’s consultation on the reform of the Suspicious Activity Reporting system which proposed the introduction of a failure to report money laundering offence. It is widely acknowledged that the NCA is overwhelmed with the number of suspicious activity reports it currently receives and the focus should be on the quality of reports, rather than the quantity. The concern is that the introduction of a ’failure to report’ money laundering offence will encourage even further defensive reporting out of fear of committing an offence, and in fact could result in an even greater increase in poor quality reports, with few or no prosecutions which could not have been prosecuted adequately in other ways.

Interestingly, one outcome of preparations for the UK’s withdrawal from the EU, has been the extensive widening of the Government’s powers to make regulations for enabling or facilitating the detection, investigation or prevention of money laundering. These powers, contained in the Sanctions and Anti-Money Laundering Act 2018, significantly reduce parliamentary oversight and are in fact wide enough to enable regulations to be passed introducing new money laundering offences. So now the Government has time to turn its attention to anything other than Brexit, it could introduce a failure to prevent or report money laundering offence without the need for Parliamentary scrutiny.

Conclusion

All EU Member States are expected to bring into force the laws and administrative provisions necessary to comply with the 6MLD by 3 December 2020. Despite the fact that the UK will no longer be a Member State (and has opted out of this Directive regardless), the UK will be under significant pressure to remain aligned with the EU on anti-money laundering measures if it is to obtain a favourable trade agreement with the EU post-Brexit, which no doubt will provide even further impetus for the introduction of a failure to prevent offence.

Furthermore, the changes made by the 6MLD will be of importance to UK businesses, including those outside of the regulated sector, trading in the EU or with European subsidiaries or branches, as once the directive is in force, Member States will have jurisdiction over offences committed in whole or part on their territory or by EU nationals. The 6MLD is also likely to have extraterritorial reach into the UK, as conduct that occurs in the UK amounting to an offence could be prosecuted by a Member State if it was committed by either a national of that State or an organisation domiciled in that State. Therefore, the 6MLD will have an impact on any UK businesses trading in the EU, regardless of the fact that the UK will no longer be a member.

Whether the UK will maintain its reputation as a world leader in the fight against money laundering post Brexit remains to be seen. As it appears highly unlikely that the UK will introduce a failure to prevent money laundering offence by December 2020, especially given the lengthy delay in even publishing a consultation on the issue, the approach of EU Member States and the UK to corporate liability for money laundering will have already diverged by the end of this year.

[1] It was reported on 10 February 2020 that HMRC have nine live “failure to prevent tax evasion” investigations with a further 21 opportunities under review. Those investigations and opportunities under review cover “10 different business sectors, including financial services, oils, construction, labour provision and software development”; and “sit across all HMRC customer groups from small business through to some of the UK’s largest organisations.”